As part of a continuing effort to escalate economic pressure against the Iranian and Syrian regimes, President Obama issued a new executive order “Prohibiting Certain Transactions with and Suspending Entry into the United States of Foreign Sanctions Evaders with Respect to Iran and Syria,” on May 1. This “Foreign Sanctions Evader Executive Order” (FSE EO) is a significant development in that it marks the first time the US government has made the evasion of US regulation a basis for the imposition of economic sanctions. Following on the heels of the Comprehensive Iran Sanctions Accountability and Divestment Act (CISADA) and Section 1245 of the National Defense Authorization Act (NDAA), this authority also represents an intensifying use of what some consider “secondary” sanctions — programs that impose countermeasures against foreign persons for dealings with parties subject to US sanctions.
What is covered by this EO?
Complicated even by United States Office of Foreign Asset Control (OFAC) standards, this new program gives OFAC the authority to impose sanctions against foreign persons who:
- Violate, attempt to violate, conspire to violate or cause the violation of Iran- or Syria-related executive orders;
- Facilitate deceptive transactions for or on behalf of any person subject to Iran- or Syria-related executive orders; or
- Are owned or controlled by, or are acting for or on behalf of, persons determined to meet the above criteria.
These Iran- and Syria-related executive orders include both list-based programs targeting, among other things, designated terrorists, weapons proliferators and human rights abusers as well as government entities subject to blocking under the respective country blocking programs.
This program is unique in several respects. First, it carries no blocking or asset freezing requirement. Identified persons (note the use of the term “identified” rather than “designated”) are cut off from dealings with US persons, including US financial institutions. Accordingly, financial institutions must reject rather than block affected transactions, and businesses involved in international trade must refrain from dealings with listed parties. Financial institutions must also restrict accounts held for listed persons, not because the account is blocked, but because allowing its normal operation would constitute a prohibited export of financial services. (The lack of a blocking requirement in a list-based program is unusual and perhaps reflective of a desire to temper the impact of a regime that many, particularly overseas, will view as “extra-territorial.”)
Second, the EO allows OFAC to target individuals and entities that have “facilitated deceptive transactions” – defined as any transaction where the identity of the person subject to US sanctions has been withheld or obscured— for designated parties even if it cannot be established that the underlying purpose of this suspicious activity was, in fact, sanctions evasion. In other words, from an evidentiary standpoint, evasive intent can be imputed to any deceptive transaction, giving OFAC significantly targeting flexibility.
Why is this EO necessary?
In its Frequently Asked Questions, OFAC states that the new program “expands Treasury’s ability to address the behavior of foreign persons determined to have violated or attempted to violate U.S. sanctions…where the foreign person had no physical, financial, or other presence in the United States and did not submit to U.S. administrative proceedings.” OFAC further explains that it may use this authority where it “appears that a foreign person violated U.S. sanctions on Iran or Syria but may not meet criteria for designation under existing Executive Orders.”
This guidance suggests that a primary purpose of the FSE EO is to create leverage against foreign persons who may otherwise have little incentive to halt dealings with sanctioned parties either because such transactions are permissible under local law or because they have no connection to the US financial system. It appears that OFAC’s (not unrealistic) hope is that foreign sanctions evaders might choose to halt their activities and cooperate with US investigations when faced with the prospect of US blacklisting and the attendant reputational and commercial damage it often entails. The Order’s lack of an Annex containing an initial tranche of names reinforces the view that the primary goal of the new program is broad leverage and deterrence rather than proactive targeting.
Some might note that Iran- and Syria-related EOs already contain provisions allowing for the designation of persons who “act for or on behalf of” designated parties — language that could be interpreted as covering sanctions evasion. While OFAC’s authority to interpret “acting for or on behalf of” is broad, OFAC may have considered that its internal evidentiary standards – which are quite rigorous — could not be “stretched” to cover evasion, thus necessitating a new authority.
Who might be targeted?
However Treasury intends to use this new authority, whether as a diplomatic or a targeting tool, one thing is certain — it will be used; against exactly whom is an open question. OFAC provides some clues in its FAQs when it draws special attention to foreign persons lacking a US nexus. So it is unlikely that the FSE EO will target foreign financial institutions or other businesses with a US presence or interests, as these entities are already within reach of US enforcement. Rather, OFAC will likely take action against smaller non-bank financial institutions such as money service businesses and currency exchanges as well as trading companies in the Middle East and Gulf regions known to facilitate Iranian economic activity.
What does this mean for international financial institutions?
Probably not too much. As described above, it does not appear that international financial institutions, at least those with a presence or significant interest in the US financial system, are the primary target for this authority. Certainly, banks will want to remain vigilant when dealing with counterparties posing higher levels of Iran risk (such as those described above.) A leading practice, which a number of financial institutions follow, is to develop internal “watch lists” of higher risk entities, drawn either from open source research, internal transaction monitoring or referrals from other institutions. But until OFAC adds specific names to the SDN lists, there are no direct obligations.
Over the last year, the remaining “loopholes” in the US Iranian and Syrian sanctions programs – the lack of a comprehensive government asset freezing – have been closed. There is simply no more blood to be squeezed from the domestic sanctions stone. Going forward, the primary way to exert additional pressure on Iran and Syria is to impose costs on foreign persons that continue to do business with sanctioned parties. And, to date, the primary means of doing so have been through congressionally imposed statutory programs like CISADA and NDAA. The FSE EO represents the administration’s first independent foray into the secondary sanctions arena. While only time will tell whether Treasury will use this authority more as a deterrent (as it has in the cases of CISADA and the NDAA) or as an active targeting program (as it has with most Iran- and Syria-related EOs), it is clear that an important new threshold has been crossed in the use of economic sanctions.
The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.